This Is How Professional Traders Figures Out BTCs Next Move!

15 Mei 2022

The title is misleading - I am not a professional trader BUT I know how professional traders act.

TL;DR - Bitcoin is at a range low with the break of 30k potentially being a fakeout. Probability still favours bullish extraction of the range especially if the weekly candle closes as a hammer candle. The three patterns (marked 1 / 2 / 3) are potentially patterns that may emerge which will give more probability towards certain paths for future price action.

Probability is the priority of the professional trader. They will NEVER care about catching the "top" or the "bottom" of a move or getting a x100000 home run if it was not done with an understanding of the probability (and risk) behind your trade. Translating this to laymen terms - if you are buying when bitcoin is in the process of selling off and UST is blowing everything up without more thought than "It can't sell off much more!" you are not trading you are gambling and you WILL lose more money than you earn over the course of your life. That is not an opinion - it is a statistical fact.

Professional traders are professional because over the course of their lifetime/thousands of trades, they are able to consistently win. Just like a casino, it doesn't matter how much they win in each trade but if they are consistent in returning profits and can make a regular income from trading. That is it. There is no difference between you and them other than their understanding of when to take a trade because the probability is on their side and when to not get involved. (and ofcourse thier understanding of risk but I will touch on that in a post about risk in the future).

But how do they figure out probability?

A mix of experience, technical analysis and macro-economic sense all combined under the roof of emotional control. So lets work through these factors in relation to Bitcoin above.

1: We are in a range (when price oscillates between two distinct areas - with the range highs being set in January 2021 & Oct/Nov 2021 (60k), and range lows set in June/July 2021 & now (30k)) that has followed a bullish range (when price oscillates upwards, with pronounced higher lows and higher highs). With experience, you learn that more often than not trends continue - I am sure you have heard the term "the trend is your friend". Because of this statistical fact, if you trade on the side of a trend you have a higher probability of winning than losing. As we trended bullish prior to this range forming, regardless of what shape this range takes we already know that there is a statistical probability in favour of the range being broken to the upside. This flavours our buying within the range, favouring buying opportunities rather than shorting.

2: Looking at the pattern of the range we can see an important element that weights bullish probability - a slight break of the all-time high in Oct/Nov. This adds more weight to the probability of bullish extraction because it simply means there were more buyers than sells EVEN AFTER 6 months of Bitcoin "crashing". Ontop of this, sellers took longer to gain control of price than back in January 2021. As time has passed, bullishness has remained or even grown. This tells us value is increasing over time.

3: While the most probable outcome following the break of the all-time-high was a test of a minor pullback support (47k/41k/37k) followed by a reactivation of bullish price action and a break up of the range, we are now back at the range low. This is where emotion comes in. How scary was that sell off?! The whole crypto space died! Yet we are set to close the weekly candle above 30k and that wick below doesn't actually seem too bad when looking at it from such a large timeframe (weekly - ignore the 15min/1h/4h/1D - those timeframes are much more chaotic/random and are superseded by the superiority of weekly and monthly trends (macro-trends)).

Given all of the above the professional trader is able to understand the wider picture and look beyond the emotions and news of the last few days. There is a statistical probability of us breaking the range to the upside AND we are sat in a buy area (as we are at the range low). Despite the massive sell off, we are failing to make significant candle closes below range supports and so now the professional trader (having established the overall theme/context they are trading in (bullish tainTed range with bullish elements and a potential range fakeout / stoploss hunt) will zoom in and look at candlestick patterns to determine probability further:



Check out the "Area of Interest". We are about to close the weekly candle in a shape that is referred to as "A Hammer Candle". Understanding what happened during the course of this candle lets us understand how probable future price action is as a point of entry rather than in the wider bullish range context.

A Hammer candle is formed when the candle opens high, sellers push price lower, buyers step in and push price back up, and then the candle closes near its opening price. When this candlestick appears around a support area, it means that buyers have bought the support, fending off a bearish attack where sellers were too weak to break down the support. While it does not tell us the future, it does give us an understanding of price action and a favourable probability to buy as it is evidence that buyers are active and the support has a strong chance of not breaking.

A hammer candle is nothing without a confirmation candle. This is needed to either undermine the bullish argument or confirm it as we can not trade simply on the hammer candle (it alone is not enough information to accurately gauge probability).

I have listed 3 potential candles that might emerge next week and listed them in terms of what probability they will apply to the bullish/neutral/bearish arguments (NOTE there can be an infinite number of candles following this weeks close - while many people think trading strategies are extremely complex, they can be just as simple as identifying a favourable context and waiting for one of these very simple patterns to emerge).

1: Bullish - This artistically drawn picture of a candle following our hammer is called 'A bullish engulfing candle'. Here, price opening low and closing above the head of the hammer candlestick gives more weight to further bullish price action. It shows that sellers were unable to take over price again, and bulls were able to push price higher than that of the "sell-off" candle and retain price up there. Combined with a hammer AND the bullish nature of this range we would be able to understand that there is a pretty significant probability of ATLEAST the middle of the range if not range highs being tested.

2: Neutral - Doji / Spinning Top. This candlestick shows us that at some point during the candlestick, buyers tried to push price higher and sellers beat them back, but also sellers tried to push price lower and buyers bought them out. Buyers and sellers are evenly matched and so price is hesitating. While this is neutral, price should not linger too long at supports (ideally you want to see lots of buyers coming in and pushing price away quickly) and so a neutral candle here would have a slightly bearish taint to it. If this appears, it is likely that price will continue to hesitate around the 30k mark, with a small but favourable probability of further selling. Try and spot the Doji candlesticks in the consolidation back in May/June 2021.

NOTE: I have specifically drawn this candle with a wick that goes ABOVE the high of the hammer candlestick. A common trading strategy for a hammer is to wait for the high to be broken by the next candle, then enter long as a breakout trade (in the hopes that a bullish engulfing will emerge). This is correct BUT an emotional mature trader often waits (especially when macro-economic risk is so high as it is right now), for the candle to close as a failed break out above the hammer high can often occur before sellers come down and push price down nearer the close of the candle. When that happenes, we wick above the high and then close in something like this doji, trapping all those breakout traders in their long positions and adding more weight to any selling pressure if the support were to then be broken and they needed to close thier long.

3: Bearish - Reverse hammer. This says it on the tin - it is the opposite of a hammer candlestick. Buyers tried to push price higher but sellers took over, closing the candle at the lows. This would tell us that there is still lots of sellers keep to get out and undermine the bullishness that the hammer candlestick presents. Notice how one appeared back in May/June 2021 (the week of the 24th of May)? This shows us that after the big drop, buyers tried to catch the bounce but sellers were still present. This indicates sustained selling pressure is more likely to continue, and so there is a statistical probability of further attempts at the lows made over the next few weeks.

Lastly - let's pull EVERYTHING together.

1: We are in a range with a bullish trend beforehand, tainting the range to the bull side.
2: We have a bullish element within the range of a slightly higher high.
This means that any attempt at the range low has a statistical probability of being bought, and the range has a statistical probability of the bullish trend seen prior to the range re-emerging.
This then means any time we are at the range low, it should be seen as a buying opportunity.
1: Wait for appropriate support (30k is extremely strong major support and prior range low).
2: Wait for an appropriate candlestick pattern (hammer in this case)
3: Wait for confirmation to favour bullish price action.

That's it. It's that simple - This is an opportunity for inventory add or a swing trade with a stop below the wick of the hammer candle, and take profit targets at 37k, 47k & between 51-56k.

Trading strategies do not need to be complex (in fact the simpler the better). When I first learnt this I looked down on the lack of complexity - I thought trading was extremely hard and you needed as much information and indicators and colours as possible to eliminate all doubt!

But truth is: That market will go where it wants to. You can not know where that is. You are not an all-knowing being and sadly - all your information is information everyone else knows. Your ego and sense of needing to control are exactly the reason why most people can not trade. The market is the collective knowledge of all participants. Understanding it is akin to understanding the complexity of the human condition (as ultimately participants' wants, fears, greed, knowledge is baked into where they think price should be bought or sold.) Letting go allows you to see the simplicity in chaos, objectively plan for the most probable course of action, then sit back and watch the fireworks!

P.

16 Mei 2022

Nota

Just of note: the 3 patterns I have noted do NOT need to look exactly like this. What is key here is not to have the mentality of having a print out with these exact pictures that have a body of = height and a wick of X length and if they don't look like that then that isn't a XXX candle!

Instead, understanding the flow of price action inside the candle (within the lower time frames) allows you to appreciate and gauge the probability of potential future paths of price action. A bullish engulfing with a very low wick for instance would still be valid, BUT as price action within the candle retested the low rather than simply beelining it to the break of the hammer candlestick high, that means it is not as bullish and so probability of further bullishness is slightly lower than the straightline option.

That is the point of this post - not to give you a "THIS MUST LOOK EXACTLY LIKE THIS AND THEN THIS WILL HAPPEN" but rather "understand the mechanics of price action and you will be able to see all the different doors price can go through."

Ultimately as traders, we do not predict but plan and prepare for any eventuality. We trade on the most likely eventuality while being unemotional and unbias as to appreciate that price will go wherever it wants to.

30 Mei 2022

Dagangan aktif

Nearly three weeks on and finally we have some motion here!

I will be publishing a chart tomorrow with a detailed description of the last three weeks and how price action has shifted bullish but in the mean time:

Take a look at the "Area of interest" after including the last two weeks of price action (on the weekly timeframe). You can see the large hammer candle from the original post. But it has now been followed by not one but TWO additional hammer candles. On the smaller timeframe, this means that a range has formed where buyers have consistently bought the lower (below 30k) areas quickly and price failed to close decisively below 30k.

What this means is that there are now 3 buy signals all lined up and with this Sunday close above 30k, and above the high of last weeks hammer candle we have a bullish trade on the table.

If you don't know what I am talking about, check out trade stragies for hammer candles (or re-read my post!) The simple thing here is that the stop is defined (so how much you can loose, otherwise known as "risk" is defined very easily as being slightly below last weeks hammer candle) and the entry price is defined (above the high of last weeks hammer candle & if we are doing this by the books, when this weeks candle closes at midnight tonight!) With this knowledge we can very easily gauge how much you can loose and how much you can gain. This is a foundational pillar for a professional trader and the FIRST thing they look before opening a trade.

Given these candle stick patterns happen ON a major support(30k area), probability is slowly but surely heavily shifting in favour of further bullish price action. While price can still break down from here, there is much less of a chance of that happening especially given we have a bullish trade signal now (about 20-40% break down to 60-80% we break up). Consistently waiting for trade set ups like this to either inventory add or swing trade are the bread and butter of a professional trader. Just like a professional pocker player, over the course of your life you will come out having won more than you lost and so if each trade nets you the same win or loss, you will end up richer, more relaxed and more wise because of it.

One final thing to note: how long has it taken me to post this update from when I originally posted? Three weeks. There was NO NEW INFORMATION that required me to sit in front of my computer (bar checking each Sunday evening for 2 mins to see if that had changed) and so there was nothing for me to trade.

I have been off traveling in this time and what trades have I missed? Trading is not about quantity - it is about quality, self discipline and understanding risk and reward.

P.S I have a career which funded the travel. I am not bragging just pointing out that I had no access to reliable internet yet missed nothing because trading does NOT require constant vigilance! Thats the dream right?! Work for 1 hour every few weeks to set up some trades and enjoy the rest of your life!

15 Jun 2022

Nota

Wow - that was a shock.

Here is a great example about patience and waiting for confirmation signals. The trade required not just a hammer candle but a weekly close above the high of the hammer.

As there are three hammer candlestick patterns on the 30k support any of these candles highs could have counted as an entry. Infact if you look up at the original idea you can even see that a reverse hammer formed following the final third bullish hammer candlestick which indicated the chance of bearish price action was rising!
Regardless of this if the trade had been taken, the stop would have then been placed at or just below the hammer candle low (anywhere between 26k/28k in these cases).

Here is the catch - if this trade was taken by the books it would have required a weekly candle close above the hammer high (above 31kish) and that never happened and so the professional trader would NOT have entered.

Even if we had had a candle close signalling an entry, the professional trader would have had another crucial weapon to fight against major financial ruin - a stop loss.

With the hammer candle stick pattern, we have a clear definition of "risk" (how much you can lose) defined by a stop loss below the hammer candlestick - in this case anywhere between 26k-28k. EVEN IF you had entered, you still knew how much you could lose and with that knowledge the professional trader never goes to big.

Instead, he would have only risked 1/2% of his total account size. I know it sounds ridiculously small to risk to the untrained eye, but risking 1/2% to gain 2/4% means it only takes 20 successful trades over the course of a year to grow your account by 40/80%. Importantly it DOESNT just take 1 stupid trade to cause financial ruin. While not all of those will no doubt be successful, statistically you will gain more than you lose if you trade with probability on your side (like going long on a hammer candle stick on a major support), and so 20 trades, each taking a few hours to prepare and find the asset with the correct context to trade would only take you a full working week or so of time over the course of a year.

If you are trading with a small account size of 100k, and you grow that by even just 20% a year (assuming that just under half of your trades fail), that is still 20k earned. In just a year. Ontop of whatever job you are doing in all that free time!

I will say this just like I say in many of my posts - the less you trade, the better those trades are as you stop looking at what you are doing emotionally and instead care so much less (and so look for objective, statistically favourable trades instead). Who cares if you miss a moon coin if you know you are going to grow your account by XXX amount by doing literally a week or two worth of work.